Fading Carrier Subsidies May Hit High-End Smartphones

Last year T-Mobile shook things up in the U.S. wireless industry through its “uncarrier” initiatives. Instead of subsidizing phones for customers and making them pay an upfront cost as well as sign a costly two year service contract, T-Mobile now lets them opt for a cheaper service plan and pay for their devices in installments. Other major carriers like AT&T and Verizon responded with similar plans. Data shows that as U.S. customers move towards installment based plans, sales of high-end phone might take a brutal hit due to disappearing subsidies.

Under its new plans AT&T sold 15 percent of all smartphones in the fourth quarter without needing to subsidize the cost. John Hodulik, an analyst at UBS, believes that this number may balloon to 35 percent by the end of this year. Even AT&T CEO Randall Stephenson said last month that “the industry is at a place where you can actually see line of sight to the subsidy equation just fundamentally changing in a very short period of time.”

High-end and well performing smartphones like the iPhone will be hit the most. The cheapest 16GB iPhone 5c costs $199 with a two year contract and a whopping $649 without one. Similar devices are already showing signs of strain owing to saturation in the high-end market.

This may very well give a boost to mid-range devices which are priced around $200-$350 off contract. Oppenheimer analyst Tim Horan tells the Wall Street Journal that disappearing subsidies can put more pressure on high-end smartphones and give a boost to cheaper alternatives.

This is why most OEMs offer a variety of devices that cater to different price points. Since Apple doesn’t offer a truly mid-range iPhone, it may seriously have to reconsider its approach in the U.S. market if this trend continues.